Senators and Board Discuss PROMESA

Posted May 11, 2017

On April 7, two U.S. Senators, Tom Cotton (R-AR) and Thom Tillis (R-NC), wrote a letter to the PROMESA fiscal oversight management board [FOMB] expressing concern that the Fiscal Plan for Puerto Rico is not compliant with the Puerto Rico Oversight Management and Economic Stability Act (PROMESA).

The letter went on to list those concerns: “the Fiscal Plan’s failure to comply with lawful priorities and liens established by Puerto Rico’s Constitution, its failure to differentiate between non-essential and essential spending, its elevation of all non-debt spending above debt service, and its unexplained economic assumptions.” The letter refers to things the senators “have heard” from Puerto Rico’s creditors — apparently, that Puerto Rico’s government did not make every effort to reach agreements with these unnamed creditors before turning to Title III.

Tillis and Cotton complained in particular: “[r]ather than explaining why the Fiscal Plan was compliant, you merely stated that the Oversight Board has not taken a position on the dispute between the General Obligation and COFINA bondholder — a matter unrelated to the Fiscal Plan’s compliance with POMESA.”

The senators concluded their list of concerns with, “We are deeply concerned that PROMESA is not on track to achieve its goals of promoting fiscal responsibility in Puerto Rico.”

The senators then requested compliance certification for the Fiscal Plan which would “set forth in detail how each requirement of Section 201(b)(1) of PROMESA has been satisfied.” They also asked that the fiscal oversight board chair, Jose B. Carrion III, meet with their staff members in Washington D.C. to discuss the board’s negotiations with creditors, the board’s fulfillment of “the requirements of PROMESA,” and “any other pertinent information.”

On April 25, PROMESA responded to the Senators’ letter. “The nub of the issue with the creditors alluded to in your Letter,” the board’s response explained, “is the size of the economic pie available to be divided. The creditors insist that the pie is larger than FOMB’s economists and consultants believe it to be. The FOMB shares the creditors’ desires to enlarge the funds available for debt service, but cannot adopt lofty assumptions for available funds without violating PROMESA § 101(a) because PROMESA §§ 104(i) and 314(b) both require outcomes consistent with a certified fiscal plan’s debt sustainability analysis.”

The board insisted in their response that the spending cuts in the fiscal plan are as large as possible. “The fiscal plan the FOMB certified starts by increasing revenues and cutting virtually all expense areas, including education, healthcare, pension, employment, and even legislative expenses,” they said. “[T]rying to impose additional cuts would create the opposite effect than creditors want. It would render Puerto Rico’s viability impossible because further short run savings would lead to an unstoppable downward fiscal spiral in the long run.”

The board response included the following facts:

Puerto Rico has unfunded pension liabilities to public employees approaching $50 billion and its three of 13 public pension funds are each either already out of funding or will be out of funding in summer 2017. Average pension benefits are $14,000 per year, and roughly one-third of employees are ineligible for Social Security benefits.

In December 2017, Puerto Rico will exhaust its supplemental Medicaid funding from the federal government. This imposes new healthcare coverage demands on Puerto Rico’s own resources of approximately $850 million in the next fiscal year

The creditors’ concerns reported in the Letter are that all non-debt spending is elevated above debt service and there is no differentiation between non-essential and essential services. The creditors have it in reverse. The fiscal plan first reduces spending and increases revenue to the maximum extents possible without preventing the essential reversal of Puerto Rico’s fiscal sustainability, and then computes the funds available for debt service. The whole purpose of increasing revenues, cutting expenses and reallocating tax revenues to the Commonwealth is to respect priorities and to maximize funds for debt service.

The FOMB and government held more than 30 meetings with creditor representatives from December 2016 through March 2017. The current governor was inaugurated January 2, 2017 and proposed a fiscal plan on February 28, 2017. Thereafter, creditors have requested a new fiscal plan that allows issuing them more fixed-payment debt. The FOMB and government convened a mediation on April 13, 2017. Mediation efforts are ongoing..Title VI settlements require both the FOMB and creditors to agree.

The board went on to summarize Puerto Rico’s economic position:

From fiscal years 2006 through 2015, Puerto Rico’s real GNP fell every year except one. The Economic Activity Index comprised of four factors (payroll employment, electric power generation, cement sales, and gasoline consumption) fell from 160.0 to 124.1 between August 2005 and August 2016.

From 2003, Puerto Rico’s population has declined over 9% down to less than 3.5 million people in 2015.

According to the U.S. Census Bureau’s 2015 community survey, 46.1% of Puerto Rico’s residents live below the federal poverty level compared to the national average of 14.7%. For Puerto Rico children under age 5, 63.7% live under the federal poverty level, compared to the national average of 22.8%.

Puerto Rico has approximately $74.5 billion of bond debt and $48 billion of unfunded pension liabilities. As of 2012, Puerto Rico’s public debt as a percentage of aggregate income was 100.7%, as compared to 29% for New York, which has the highest ratio of public debt to income in the United States (the average is 16.8%).

The board response listed cuts already made and those planned for upcoming years to 2022. Since there is a status vote coming up next month, it would be impractical to make predictions further into the future.

Meetings with creditors were detailed. The board also reported concerns about the creditors, saying, “The certified fiscal plan’s debt sustainability analysis makes plain the funds available for debt service. Creditors responded by asking the FOMB to certify a new fiscal plan with more frothy and optimistic assumptions.”

“It is important to recognize that the creditors whose concerns you reported in your Letter are in the midst of negotiations with the FOMB and government,” the board response concludes. “When viewed in the full context of facts set forth above, it becomes clear that airing those concerns is part of their negotiating strategy. In fact, the creditors already know most of the answers in this response.”

The board then pointed out that a compliance certificate had already been provided, and was included with their response.

The response also included a section called, “What Congress Can Do.” The board referred to the recommendations of the bipartisan Congressional Task Force on Economic Growth in Puerto Rico.

“The FOMB invites Congress to help enlarge the pie, such as by renewing the flow of Medicaid funds under the Affordable Care Act to Puerto Rico…Similarly, the FOMB encourages Congress to consider other Task Force recommendations”

The response concluded with, “In summary, PROMESA requires the FOMB to achieve for Puerto Rico fiscal responsibility and market access. Subject to those requirements, the FOMB wants to maximize returns to creditors and to ensure economic growth. The FOMB is balancing fairness to Puerto Rico’s people with paying creditors while not allowing debt to exceed levels that would prevent fiscal responsibility and market access.”